Over the last week, we have seen a host of announced mergers and acquisition. Taken together, in my opinion, these would harken some scary conclusions.
Buy me to the moon?
In the last week alone, we saw three acquisitions announced that show how fiercely these companies want to be bigger. It all seems about becoming the titan of the industry. If NASA and Roscosmos (Russia’s space agency) are both looking to fly manned missions back to the moon, these different corporate management teams are looking to buy me to the moon.
- Allergan and Pfizer merger would make a combined entity with over $300 billion in valuation (WSJ) – 29 October. This comes on the heels of Pfizer’s acquisition of Hospira earlier this year (for $15 billion – Guardian)
- Hyatt ($7 billion valuation) is apparently targeting the acquisition of Starwood Hotels (c $13.5 billion valuation) – 28 October via CNBC
- Walgreen to buy Rite-Aid ($17.2 billion) – October 28 via USA Today
Earlier in the year, we had many other huge merger & acquisitions announced or completed:
- Visa to merge with Visa Europe ($21 billion) – August 20 via Sky News
- INTEL acquired Altera ($16.7 billion) via Bloomberg – June 2015
- CVS acquired Omnicare ($12.7 billion) via Bloomberg – May 2015
- Charter Communications acquired Time Warner Cable ($78.7 billion) via VentureBeat – May 2015
- Heinz and Kraft merger via Forbes ($46 billion deal) – July 2015
Why the gold rush?
There are a few answers to this question. First, and most emphatically in terms of the timing of these announcements, the era of incredibly low interest rates may be drawing to a close. These acquisitions can be carried out with extremely cheap money, helping to leverage any gains and synergies. Secondly, these mergers are all about gaining size and scale to cut out fat, leverage economies of scale and improve bargaining powers. Thirdly, one has to assume that the acquisition is the only way these companies believe they can respond to the pressures for never-ending growth. Along the way, many investment banks and lawyers are going to take large fees; while there will be much heartache and toil within each company, to face the integration and inevitable “change management.”
the problem of Growth via acquisition
Taking aside the fundamental challenge of merging cultures, the customer is bound to be the one that loses out. It’s hard enough for small companies to be customer-centric. Going through the turmoil of an acquisition, many managers will be more worried about their own skin than their customer’s pocket book. Considering how many companies are preaching the need for entrepreneurial spirit, agility and more innovation, these titans of industry will be hard pressed to make quick work of the integration in order to earn shareholders greater profits. I wonder to what extent employees and customers can reasonably get their share of that new pie? Especially in an era where brands need to “think different” and where customers are increasingly aware — via heightened transparency — of the internal shenanigans, these bigger companies are going to struggle to succeed.
[tweetthis]If a company can no longer manage organic growth, buying size and market share is not likely to be the solution.[/tweetthis]
Looking back to last year, when Omnicom and Publicis failed to consummate their merger to become the #1 worldwide agency, I have to believe the end result is that they and their customers are all better off as a result.
Interesting article. Low interest rates and high liquidity are clearly a factor. In the finance industry there is an argument that you don’t want to be too big, after having achieved enough scale.
Overall, there should be a natural owner or best owner for an asset or company … for that owner, the value is the highest – it’s then a matter of negotiating the price. Ultimately, that could be better for customers, but to your point, in the transitioning phase it could be painful for customers.
A lot of it depends on clear strategic logic and relentless execution.